All Forum Posts by: Alfred Bell

Which brings me to another key question...

(I was basically told on this thread that it would be illegal for me to take the steps necessary to see if a buyer/borrower was qualified... ie. "don't have your fingerprints on a Form 1003 and don't discuss terms with the borrower", etc.)

How am I going to be able to get a credit app filled out, do a credit check, determine borrower's FICO, income, debt/income ratio, etc? Can I hire a company to do this for me?

That was my understanding from Bill Gulley.
What originator is going to do this and put his/her name to it without ensuring that the loan is all above board (borrower is qualified, property appraisal, etc.)? Or am I confused and misunderstanding this point?

I'm laying out my in-sequence plan for this new strategy and will probably have a few questions/confusions that I'll need to sort out.

Marc: You sort of just answered it, but... I'd still like your feedback on this as it seems to be the most iffy part of this plan...

Confusion: My original understanding was that the purpose of having the loan originated by a licensed loan broker was to ensure that it was in compliance with Calif law and valid, so that it would be a credible note, able to be sold at a later date on the secondary market. But now I understand that the originator would cause for there to be a loan app, appraisal, credit history, job/income data, debt ratio, etc. And, if the originator isn't satisfied with the requirements then he/she won't originate the loan and will kill the deal. Also, this seems to be a major contradiction to my offering "owner financing, no bank qualifying" because using an originator is tantamount to the same thing. (Would I actually be better off doing this myself, generating my own loan file and just having the note and TD done by a competent escrow company on doc forms from a title company that are Calif legal?) Please clarify or explain? Thanks.

Oops! Forgot to fill in the date of the post I was referring to in my last post. It was May 27 10:46am post. As I said earlier, I'd appreciate any feedback on this strategy. Thanks.

Thanks for that Marc. Also, I'm just wondering...
Does anyone see any flaws, unrealities or unworkability in the new, hopeful strategy I posted at (DATE) to create a note and have my money partner hold it for the time period necessary to recoup his loss from the sale via the interest payments he will receive (and then either sell note or continue to hold it longer for further profit)?

Might just wind up paying for the service company ourselves and consider it a cost of doing business. If I can get the buyer/borrower to pay for it I will, but not if it will create an upset.

HEY MARC!
Get back to your wife, your beer and the vacation at the lake. Relax. Not a peep out of you until tomorrow!

Creating this note for my money partner is a bit easier than having to do it for institutional investors that we would want to sell it to after a year (who are going to want high discounts).

The plus points of this strategy are: We can sell at a lower price which will allow us to finally facilitate a sale; my partner will be free from holding costs, property liability and depreciation; my partner has a 7.25% secured note in his portfolio (he'll be happy, since his money was earlier sitting in 13 week treasuries at .25%); not taking advantage of a buyer/borrower (he gets a fair price, we ensure he can make the payments, etc. = win/win) so we can't be hit for predatory lending.

The ideal buyer would be... institutional financing just won't work for him/her but he/she is in a financial condition and has the wherewithal to make the payments; he/she has the DP (or can get it somewhere); his/her debt to income ratio allows him/her to take on the mortgage; he/she has a solid workable program to repair their FICO or whatever may be going on; he/she isn't represented by a Realtor; he/she loves the condo and location and really wants the American Dream of ownership.

My only real challenge would be to create the marketing campaign that will be able to successfully find this buyer/borrower in the off season.

If my only choice is a buyer/borrower represented by a Realtor... then we'll have to take the hit for the 3% commission and readjust our projections for break even/profit (altho 3% of 260k is only $7,800).

I sent my bright idea to my money partner and I'm waiting to hear back as to whether he is willing to go along with it or not.

Here is my idea... I believe that if my money partner is willing to HOLD the note for an extended period (or until maturity) it will completely change the dynamics of this situation and allow for the owner carry strategy to be workable and for it to end in a win/win.

Converting this condo into a "portfolio note" winds my money partner up with a safe, high yielding, long term investment. And gets him out of property ownership = frees him from the holding costs, the exposure to liability of property ownership, and the strong possibility of owning a depreciating asset (I don't believe prices have hit bottom yet in this area yet).

This strategy would allow us to sell the condo at a lower price, since my money partner will be able to recoup his losses via the interest on the note (and the first 5+ years of a 30 year amortized note is almost pure interest). He doesn't have to sell the note until the combination of interest received and and what a note investor is willing to pay for note allows him to recoup his initial capital, or make a small profit. But to make this work we would have to have a prepayment penalty on the loan.

I worked out a rough scenario just to get an idea of numbers and time. Let's say we structured a note for 7.25%; 8 year term (amortized for 30 years); 20% DP; balloon payment due at end of term. Let's say we sell condo for 260k.

ROUGH CALCULATION EXAMPLE:

20% down payment = $52,000. We would finance the balance of $208,000 @ 7.25%. The principal and interest payment on this loan would be $1,418.93 per month = $17,027.16 per annum.

(Note that the P/I payment is equal to what this unit would currently rent for.)

1st year income: $52,000 DP + $17,027.16 payments = $69,027.16
2nd year cumulative income: $86,054.32
3rd year cumulative income: $103,081.48
4th year cumulative income: $120,108.64
5th year cumulative income: $137,135.80
6th year cumulative income: $154,162.96
7th year cumulative income: $171,190.12
8th year cumulative income: $188,217.28

(Note: the above are rough numbers because taxes and inflation aren't being figured into the equation. Also a Realtor commission isn't included if a Realtor became involved in the sale... which we would try and avoid. And transactional costs of escrow and the cost of paying a licensed mortgage originator to create the note isn't included. And the cost of a loan servicer isn't included... but that will be the borrower's cost anyway.)

(If money partner managed to hold note until maturity, the balloon payment due after 8 years would be $186,973.13... $188,217.28 + $186,973.13 = $375,190.41 total cumulative income... $375,190.41 MINUS $280,000 (initial investment) = $95,190.41 profit.)

My money partner is into this condo for approx 280k.

If the buyer/borrower refinanced after two years into the loan term, my money partner would've received $86,000 in DP and P/I payments, and would then receive $203,822 from the refinance, putting him at $289,876... almost 10k over his initial investment which would technically be a break even. (So we'd need a 2 year prepayment penalty on the note.)

If the buyer/borrower doesn't refinance after 2 years then my money partner moves into a profit phase. He could also sell the note after 4 or 5 years at a decent discount and recoup his money as well.

Obviously there is more to this but this post is getting too long so I'll end here. I have some other thoughts which I will post shortly.
Thanks for listening/reading.